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Edited Transcript of NK.PA earnings conference call or presentation 29-Apr-20 4:30pm GMT

Q1 2020 Imerys SA Earnings Call

Paris May 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Imerys SA earnings conference call or presentation Wednesday, April 29, 2020 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alessandro Dazza

Imerys S.A. - CEO

* Olivier Pirotte

Imerys S.A. - CFO

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Conference Call Participants

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* Eric A. Lemarié

Bryan Garnier & Co Ltd, Research Division - Research Analyst

* Jean-Christophe Lefèvre-Moulenq

CIC Market Solutions, Research Division - Financial Analyst & Sector Coordinator

* Josep Pujal

Kepler Cheuvreux, Research Division - Co-Head of Sustainability Research & Responsible Investment

* Pierre Bosset

HSBC, Research Division - Head of French Equity Research

* Sven Edelfelt

ODDO BHF Corporate & Markets, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Imerys 2020 First Quarter Results Webcast and Conference Call.

I'll now hand the conference over to Mr. Alessandro Dazza. Sir, please go ahead.

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Alessandro Dazza, Imerys S.A. - CEO [2]

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Thank you, and good evening to all of you. Thank you for joining us today to discuss Imerys' First Quarter 2020 Financial Performance. It is a real pleasure for me to be here this evening at my first conference call with you. Though this happens at definitely difficult times.

Let me start by saying that we sincerely hope that yourself, your dears and your colleagues are all well.

Joining me today, tonight, is Olivier Pirotte, our Group Chief Financial Officer. I will begin my presentation with an update on the impact of the COVID-19 virus on Imerys and of our response to this pandemic, before walking you through the first quarter results with Olivier. As always, the presentation will be followed by an open Q&A session.

As already announced with our press release on April 6, the group has created a crisis management team to face the emergency caused by the spread of the COVID-19, and has adopt a strict monitoring process under the direct supervision of the executive committee and myself personally. I think that Imerys has definitely done a good job and has been very reactive and has managed as much as possible to limit the negative impact of the COVID-19 pandemic by not only protecting its financial performance but, even more important, by ensuring the health and safety of its employees and other stakeholders.

At the same time, we have managed to guarantee continuity of supply to all our customers. The group has showed its commitment to help the communities in the areas where we operate and has, among others, donated masks and other medical items wherever possible and wherever ever needed. Patrick Kron, our group Chairman, and myself, have decided to reduce our remuneration by 25% for the period during which Imerys employees will be involved in short time working schemes. Also, the Executive Committee of this group has decided voluntarily to reduce its salary by 15% for the same duration and to contribute this amount to solidarity purposes in relation to COVID-19.

Finally, to comply with the regulations empowered by the French government, and even more important to protect our shareholders, we will maintain our general assembly on May 4. However, this will be held exceptionally in closed session. As announced earlier this month, we will reduce the dividend by 20% to EUR 1.72 per share versus with initially planned of EUR 2.15 per share. The option to receive all or part of this dividend in form of new shares is maintained. As a reminder, GBL, so Groupe Bruxelles Lambert, our majority shareholder with a 54% stake, has confirmed its intention to opt for a dividend in shares for the totality of its holdings.

If we now look really at the impact of this virus on our business, what we can say it is definitely an unprecedented situation. And as you can imagine, we are experiencing significant disruptions in our commercial and industrial operations as we often have to comply with lockdown measures ordered by local governments to contain the spread of the pandemic, but also due to a decline in demand in certain end markets, notably automotive, iron and steel and construction in particular, as well as supply and logistic difficulties in certain geographic areas.

In the first quarter of the year, the COVID outbreak first hit our operations in China, mostly in January and February, where -- however, now, our plants have resumed operations with a utilization rate above 85%. Today, the impact is felt worldwide. As of April 24, so basically last Friday, out of 224 industrial sites worldwide, 22 plants were temporarily completely shutdown and 46 plants were partially affected in their capacity to fully operate, particularly in France, in Italy, in South Africa, in India, in Malaysia and in other countries.

The spread of the virus is impacting basically all industrial markets, some of which, as you might remember from previous communications, were already soft entering this year. Paper markets have been affected to a lesser extent, though demand remains, since years, structurally declining.

The construction sector showed resilience overall before lockdown measures became effective in March. It is worth also reminding that consumer businesses like food and beverage, pharma and health care and agriculture, are holding well, even growing. All in all, we have estimated that the COVID-19 pandemic has caused a drop in revenue, quantifiable in approximately EUR 34 million on our quarter 1 revenues. This represents approximately 3.3% of our sales out of a total drop of 8.5%, as we will see later on.

As COVID-19 only hit Europe in March and Americas end of March, beginning of April, we do expect our results to be more severely impacted in the second quarter of the year.

If we now move on to our Slide 7, you will find here some details of the action plan we have announced on April 6. Our objective is twofold: On one side, we would like to limit the impact of the volume drop on our results and cash flow; on the other side, we would like to preserve the strength of our balance sheet. Our plan has received the full support of the Board. And as you can see summarized on this slide, it includes specifically -- firstly, a reduction between EUR 70 million and EUR 130 million of fixed cost and overheads. The amount of savings we will be able to realize in this range depends on the effective level of activity going forward, which today is unknown. Such savings will come on top of those promised and generated by the Connect & Shape transformation plan, which we launched last year, with the target of achieving, I remind you, EUR 100 million of gross savings by 2022, having already achieved EUR 28 million last year on a run rate base. Secondly, we target a reduction of capital expenditure to a maximum of EUR 250 million for this year. This is significantly below the typical range of Imerys, considered between EUR 300 million and EUR 350 million on a yearly basis. We will make sure, however, that the quality of our assets will be preserved. Thirdly, we will aim at lowering our working capital requirements in line with the expected reduction in the level of activity, notably acting on inventories and their decrease.

Moving on to our liquidity situation. I'm firmly convinced that it is essential today to be able to count on a strong balance sheet and adequate liquidity to successfully overcome and get through this crisis. Imerys has both. As of March 31st of this year, we had access to EUR 1.8 billion of liquidity, including about EUR 800 million in cash and EUR 1 billion of undrawn bilateral credit lines with an average maturity of 2 years. The aggregate principal amount of the bonds issued by Imerys is, I remind you, EUR 1.924 billion with an average maturity of 5 years and very limited repayments over the coming years. In this respect, there is a bond repayment due of about EUR 224 million scheduled for the end of November which is, at the moment, fully covered.

It is also worth mentioning that Imerys has only 1 bank covenant with a cap of 160% of net financial debt to shareholders' equity, and this ratio was only 53% at the end of last year.

If we now move on to specifically to our results on the first quarter and our financial performance, I would like to give you a few highlights before handing over to Olivier to go in more details. Our revenue decreased by 8.5% compared to last year to EUR 1.029 billion, out of which 7.5% negative inorganic growth. As mentioned before, this performance was impacted by the COVID-19 pandemic in a magnitude as much as we can assess of 3.3% or EUR 34 million. The current EBITDA for the first quarter was EUR 165 million, down 11.5% on last year, and our current operating income, EUR 83 million, down 24.7% on last year. Positively, Imerys continued to benefit from a favorable price/mix effect, which stood at 1.0% in the first quarter and confirms the strength of our business model, even in a period of crisis like we are living today.

Last important note to highlight, we continue to deliver, as I mentioned before, on our commitment to generate EUR 100 million of savings by 2022 through the Connect & Shape transformation program. If we take a closer look to the markets, underlying markets and their trends, in terms of volumes, consumer goods continue to bode well, the best new in this quarter, but we took clearly faced headwinds in other industrial markets, partly due to the spread of the virus, but partly also due to softness, which resulted in, as mentioned already, in an overall drop in volumes of 8.5%. If you look at the bottom part of this table, you can well understand that the deterioration of manufacturing activity has hit, particularly in automotive, with a drop of 24% in Europe in the first quarter compared to the same period of last year and 9% is steel production in Europe, and even higher if you consider only the European community, so let's say the [EU 27].

Paper markets continued showing structural decline. Construction markets demonstrated resilience, in particular, until the end of the first quarter when strict lockdowns in many countries created -- or generated a decrease.

If we take a look at our price/mix, even in this difficult market environment, once again, we have managed to maintain a positive price/mix effect. In absolute terms, our pricing efforts resulted in a contribution of EUR 9 million.

Very good news came also from the variable cost side. We could benefit for sure from downward trends in certain raw materials as well as energy and transportation. But this, combined with an excellent work done by our new purchasing team in negotiating with suppliers, resulted in a reduction, so in a drop of variable costs after inflation, in the amount of EUR 2 million for the quarter.

We will go now in a bit more details on the single figures, and I hand over to my colleague, Olivier.

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Olivier Pirotte, Imerys S.A. - CFO [3]

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Yes. Thank you, Alessandro, and good evening, everyone. I hope indeed that you are all well. So let's pursue and walk you through our quarterly financial performance in more details, starting first with the revenue on Page 13.

What does this chart tell us? First, sales reached out EUR 1.029 billion at the end of March 2020, and are down by 8.5% or EUR 95 million on a reported base. Out of that 8.5%, around 1/4, meaning EUR 23 million, resulted from negative scope effect. The majority of this scope effect, this perimeter effect, i.e. EUR 17 million, remains linked. And for the last time this quarter, due to the deconsolidation of the North American tax subsidiaries after they file for the protection of the U.S. Chapter 11 legal procedures 1 year ago. Additional perimeter impact corresponds to disposal of some noncore assets in the portfolio. So that's for the first.

On the second level, group revenues are in Q1, down organically 7.5% year-on-year, amid some soft markets and the COVID-19 pandemic, which has an estimated impact of 3.3% or EUR 34 million, as mentioned earlier by Alessandro Dazza. In this context, Imerys maintained a positive 1% price/mix that contributes that EUR 11 million to revenues for the period. Additionally, the revenue also included a positive currency effect of EUR 12 million, primarily reflecting the appreciation of the U.S. dollar against the euro.

Now let's move on to current EBITDA analysis. KPI, we decide to increase focus on in order to better be in line with our Capital Market Day metrics. Obviously, you still find our current operating income EBIT bridge in the appendix of this presentation.

So current EBITDA for the quarter reached EUR 165 million, which is slightly down by 2.1% year-on-year and more comprehensively, minus 11.5%, excluding EUR 18 million of one-off costs recognized in the first quarter of 2019, mostly pension fund contribution related. The year-on-year current EBITDA evolution picture is very clear and rather straightforward. You will find 1 negative impact, the lower volumes contribution, minus EUR 48 million with an average ratio on sales of around 50%. And then all positives, offset by a continuing positive price/mix, EUR 9 million; second, more favorable variable costs, around EUR 2 million; and the improvement of EUR 32 million of fixed cost and overheads, net of inflation, thanks to a strong contribution of the Connect & Shape transformation plan, streamlined force and optimize purchasing processes in the first quarter, which is in line with the EUR 100 million target by 2022. In such a context, current EBITDA margin remains strong at 16% in the first quarter of 2020.

Let's now address developments in our 2 business segments and their respective markets. Starting with the Performance Minerals segments, whose activities generates 57% of the group's turnover, with global sales of EUR 589 million in the first quarter.

At constant exchange rates and perimeters, meaning like-for-like, the Performance Minerals revenue resists nicely, with a drop limited to minus 4.8% despite an impact of the COVID-19 pandemic, first, in APAC with disruptions in China, India, Malaysia [and] New Zealand; and then in the Europe and Middle East and Africa since March, [EMEA].

This happened amid the already soft markets, in particular in Europe, notably traditional ceramics and paper. But on the opposite, and it's important to mention, that consumer markets deemed as critical supplies as packaging remain resilient in Europe and APAC. For example, calcium carbonates for food packaging, for breathable things or medical rubber for sanitary gloves maintain a good level of activity.

It's also important to mention that Performance Minerals Americas, which has been largely immune from COVID-19 in Q1, show a slight growth like-for-like. It benefited from supportive markets in filtration, paints, rubber paper and polymers, and the gradual recovery of our Willsboro plant, which has been -- which was temporarily shutdown last year, first half of the year.

Looking now at our High Temperature Materials & Solutions, our second business segment, it -- this business segment totaled EUR 449 million of revenue in the first quarter 2020, which is down slightly, above 10% compared to last year with first quarter. This decline reflects both weak market condition prevailing in the iron and steel, automotive as foundry sector, which has been amplified by the COVID-19 outbreak, and which weighted on Refractories markets, particularly in China and to a lesser extent, on Abrasives. And this rig declines reflects also further postponement in several keen renovation projects in the petrochemical, boiler or incinerator industries due to the lockdown measures in several countries.

In contrast to these trends, the relatively good performance in building chemicals made it possible to mitigate this impact of lower volumes in particular in North America.

Finally, let's look at our summarized income statement for the quarter. As you read, net income from current operations ended at EUR 49.3 million and net income at EUR 44 million. Both are down by 35% compared to the first quarter 2019. This decline goes over the one reflected on the current operating income, reflecting a higher level of financial expenses in Q1 2020. But to be said, and as a reminder, 2019 had benefited in the first quarter for a profit of EUR 17 million, EUR 12 million net of tax associated to the early repayment of a Japanese private placement maturing 2023. Out of that impact, net income would have been decreased by 22%.

So this is what we'd like to say on the net income. And I hand it over to Alessandro Dazza for outlook and the final comments. Please, Alessandro.

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Alessandro Dazza, Imerys S.A. - CEO [4]

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Thank you, Olivier, for your detailed explanation of the figures. And I'm coming now to an end with a bit of an outlook for the remaining part of the year before we open this call for questions.

From a macroeconomic point of view, we do anticipate that challenging market conditions will persist, in particular in the second quarter of this year when the full impact of the pandemic will basically hit us. In this context, Imerys will continue to execute its action plan as presented, to limit as much as possible, the negative impact of the virus on our activities and to make further progress in the implementation of the Connect & Shape transformation plan.

I am, and I remain confident in the proven strength of the business model of our company. Our diversified geographical footprint and the portfolio of specialty minerals, the agility of our teams, the strength of our balance sheet and our financial discipline, I'm sure will help us to get through these difficult times and be prepared to benefit from the expected rebound in demand upon market recovery.

Hereby, I would like to end our presentations. I'd like to thank you, first of all, for your attention. And I now be very happy to answer, with Olivier, your questions in an open session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have the first question from the line from Sven Edelfelt from ODDO.

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Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [2]

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Yes. Few questions from my side. You mentioned the capacity utilization rate of 85% in China. Can you maybe share with us what the capacity utilization rate for the other important country? That's the first question.

The second one is about the stock on the working capital. Can you maybe talk a little bit about this crucial element, especially for cash, as Imerys is usually working-capital negative when the crisis hit, when the volume are down quite hefty.

And then the last question is for Alessandro. Since you came back to Imerys, what's your view of the old Imerys and the new Imerys that was a bit reshaped by Conrad? What strikes you the most? What do you think is good in this new organization or is bad?

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Alessandro Dazza, Imerys S.A. - CEO [3]

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Thank you. Yes, I do confirm that our Chinese operations are back to a level of approximately, from plant to plant it might vary, but definitely, between 80% and 90% of their running capacity before the crisis, so basically before December of last year. The government is pushing hard to ramp up this capacity. Life is going back to normality in China as we probably all hear on television. Today, I think the gap between this number and back to really full normality is more related to exports.

Our production base in China was partly depending on exports, typically India. And it is the receiving country that is not yet able to absorb goods and merchandises as before. So a very positive picture, I would say.

As far as the Rest of the World is concerned, very difficult to give you a number because it varies from 0 to 100. What I can say is that, clearly, Italy has been impacted early and intensively. We do not track every single country and every single capacity, but I would probably say in a country like Italy, we run around 50%, being one of the lowest levels. India was completely shutdown for 2 to 3 weeks. All but 1 plants are back in operations. South Africa was closed entirely for 2 weeks. Now half of our plants, but the 2 largest plants are back into production. So I would tend to say we are probably more than 75%. U.S. is much less impacted than any other country, with basically no significant disruption so far, a drop in demand, which is coming, but no capacity limitations. And then you can continue with France and so on and so on. So very difficult to give you a specific number because it varies really from 0 to 100.

As far as inventories, levels and actions on it, I will let Olivier comment more specifically with some figures, if you can, and with some trajectories.

Coming to your third question first, yes, I'm back after approximately, let's say, 1.5 years, almost 2 years. The company has changed. It has been going, or gone through a transformation in its organization. This question was posed to me by other people before. And my answer was, clearly, I do not believe there is a right or wrong organization. Important is to be coherent to what we want to implement and to the target we pursue. I think the step down here in this transformation was the right one. It's a step aimed at reducing fixed cost and overheads, which were a bit out of control before. It's being achieved profitably. I think it is refocusing Imerys from a product -- production company to a more customer, markets driven -- end markets driven. Important, the world is changing. Competition is not sleeping. So we were always the leader in this market. We are the leader, but people are -- or our competitors are copying and targeting us. Therefore, I think we have to listen and be closer to our end markets, end user, our customers. So I think it is a step in the right direction. I'm very impressed, and I mentioned it briefly if you caught the message, I'm very impressed of what has been done in terms of purchasing. We have moved from a fully decentralized, yes, flexible and reactive organization, to a more centralized at same number of people. More centralized, more professional, leveraging the volume, group volumes to obtain better conditions. Maybe a bit slower, fine. But I think we see today the results of these actions.

So all in all, I would say, a different company. More agile, more customer-focused. We -- I guess, a year ago, I would have said we are in the middle of the river with more issues than opportunities. Today, we are almost out from the river. And I do see only the positive side of this organization, new organization.

Olivier, you want to?

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Olivier Pirotte, Imerys S.A. - CFO [4]

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Yes, maybe some comments for you, then, on the working capital. Yes, you're right saying that it has been always a point of great attention for us. You know that cash is king. And certainly, you manage it through one of these components, which is the working capital. We don't give any figures on a quarterly basis, as you know. I mean this is something we gave you on a half year basis and a full year basis. Nevertheless, this is completely part of the action plan that Alessandro described to you, and obviously, one of the key components when you face some decline and could be some significant decline in volume is to make sure that you adjust your working capital accordingly and certainly your inventory level. So it's both an adjustment to what the reality of the market, but also being able to serve our customer whatever the conditions might be and also to be able to participate to the rebound. So it's a bit early to say because I mean first quarter, we were still quite resilient. Q2 will be of another magnitude, and we will come back to you accordingly. But if you look back at our experience and what we did also by the end of 2019, this should -- gives you confidence and the flavor of how we can be proactive on that field.

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Operator [5]

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Your next question comes from the line from Jean-Christophe Lefèvre-Moulenq from CIC Market.

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Jean-Christophe Lefèvre-Moulenq, CIC Market Solutions, Research Division - Financial Analyst & Sector Coordinator [6]

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(foreign language). I have 2 questions, first follow-up question of -- you hear me?

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Alessandro Dazza, Imerys S.A. - CEO [7]

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Yes. Continue, we hear you.

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Jean-Christophe Lefèvre-Moulenq, CIC Market Solutions, Research Division - Financial Analyst & Sector Coordinator [8]

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You hear me? Hello?

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Alessandro Dazza, Imerys S.A. - CEO [9]

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Yes, we do.

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Jean-Christophe Lefèvre-Moulenq, CIC Market Solutions, Research Division - Financial Analyst & Sector Coordinator [10]

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Okay. Excellent. (foreign language), 2 questions, notably a follow up question of (inaudible). There is some echoing?

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Alessandro Dazza, Imerys S.A. - CEO [11]

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Yes, we do hear the echo as well. But if you continue really well, we will answer. Go ahead.

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Jean-Christophe Lefèvre-Moulenq, CIC Market Solutions, Research Division - Financial Analyst & Sector Coordinator [12]

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Yes. First question, inventories and working capital situation. Can you -- maybe I ask you what your clients are doing? What is the situation, inventory situation of the steel industry? As the volumes in Western Europe went down by 30% in March, roughly. And we heard that ArcelorMittal and also [France] shutdown some capacity in Dunkirk and [Fos-sur] and also in the western part of Germany. That's my first question.

And secondly, how do you see the North American situation in the coming months? We were in a very good situation in the construction, I think, weaker in the industry. Can we have more flavor on this?

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Alessandro Dazza, Imerys S.A. - CEO [13]

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Okay. I will try to answer you. I wish I knew what (inaudible) first and all our dear customers might do tomorrow. It's very difficult to -- it's very difficult to guess. But the numbers you mentioned is exactly right. It's a worrying number. And that's why I -- when looking at the markets, I mentioned this 9% drop in Q1 on Europe, knowing that Russia is one of the few countries up. The rest of Europe, especially, let's say, Western Europe is significantly down. And this is exactly what I was referring to with iron and steel soft markets already entering the year, impacted by a slowdown for sure of the automotive industry already in Q4 last year. Automotive industry completely shutdown almost in Q1 impacting even more the, let's say, iron and steel markets.

We have no idea. Situation is dramatic. You know that shutting down a blast furnace like the one you mentioned in Fos-sur and Dunkirk is a major step for a steel producer. Restarting is just as difficult. We do count on a return. When? Very difficult to guess. It will definitely depend on how fast the automotive industry can restart. It will depend on how governments will implement the announced measures, I say announced because we don't really know what they will do. But there are a lot of rumors going towards subsidies for new cars and so on. This could have a major impact on the rebound of demand.

Steel remains -- and you will see it if you analyze our numbers in detail, you will see that the business that has suffered the most over the first quarter, independently from the geography is the one that is mostly exposed to this market. So this remains an area of worry.

With regards to the U.S., you're right. The -- and our numbers show it on the first quarter, our American -- North American or American business even showed a plus. So the COVID, definitely -- so the virus definitely hit at a later stage. It is significantly impacting in April. The shutdowns in Brazil that we are hearing, in the U.S., in Mexico, are now fully there. And we do expect the second quarter to be tough. I can give you a rough feeling of what we see in the month of April. We are today on the 29th of the month. We have not closed the month, but we do track our sales at least for the large operations on a daily basis. What we see coming for this month is a drop in sales between 25% and 30% on a worldwide basis, being the U.S. maybe on the lower side, but in this range in any case. So U.S. is catching up, unfortunately, with the rest of the world. Question will be if it will exit as fast as Europe is exiting now, and we do look forward to see some good news going forward, especially in Europe, or more in Europe.

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Jean-Christophe Lefèvre-Moulenq, CIC Market Solutions, Research Division - Financial Analyst & Sector Coordinator [14]

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From the -- just an additional question related to steel industry. How is -- in 2008 and 2009, at Imerys level, we had a strong destocking effect from the industry, notably from the steel industry. Is that the case today at Imerys?

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Alessandro Dazza, Imerys S.A. - CEO [15]

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Yes. Yes, it is.

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Olivier Pirotte, Imerys S.A. - CFO [16]

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Yes, of course.

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Alessandro Dazza, Imerys S.A. - CEO [17]

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Yes. It is. And that's why -- that's why out of my experience in this field, it is not correct to say if steel is down 3%, the sales of the industry, let's say, the sales of suppliers to the steel industry will be down 3%. Typically the swings caused by a drop in steel are felt in both directions, are felt with a bigger magnitude from suppliers. Because typically as you say, when they stop, they destock completely, they stop all maintenance projects, all capital expenditures, having a much higher impact on their suppliers. And that's what we see and what we saw in Q4 and in Q1, and you see it in our numbers. But when it picks up, a 3% pick up in steel, typically does not mean a 3% pick up in supplier's business being our business is one of them. But typically it is again a multiple of it because then they restart massively their projects, their maintenance, their restocking, so it is the cyclicality, I would say, is amplified partly in the upstream businesses, upstream sectors of the steel industry.

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Operator [18]

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Your next question comes from the line from Josep Pujal from Kepler Cheuvreux.

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Josep Pujal, Kepler Cheuvreux, Research Division - Co-Head of Sustainability Research & Responsible Investment [19]

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Two questions from me, please. And a follow up just to ask you a figure that you just said and to be sure that I understood well, when you were saying that in April, sales could be down 25% to 30%? I did not catch, what were you referring to? Were you talking about the sales of Imerys in April or were you talking about the sales of steel? And in which geography. I will ask my two other questions later, maybe?

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Alessandro Dazza, Imerys S.A. - CEO [20]

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Okay. You understood correctly. As of today we do estimate our April sales, as Imerys group, to be down in the range of 25% to 30%. With a majority if not all, it will become more and more difficult to assess one-to-one what is [by us] and what is not. I would say the large, large majority of this drop is clearly new to a disruption in activities worldwide due to the virus.

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Josep Pujal, Kepler Cheuvreux, Research Division - Co-Head of Sustainability Research & Responsible Investment [21]

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Okay. So my first question is on costs, and the price-cost gap. On costs, the minus EUR 2 million that you show in Page 12. I wanted to be sure that this was at a same volume. It's the unitary cost, let's say, which is down or the decline is reflecting that you have sold and then consumed less variable costs? That's a first question, and related to that, how do you see the price gap going forward. Do you think that it will be maintained or the gap will close or open? And why -- what are the dynamics that are you seeing?

And my second question, you talked about this amplification of the volumes of your, let's say, customers, and especially you were talking about steel. Could you be more precise on this multiplier effect, if you should give a number, would you talk to 4 or 5, 6x?

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Alessandro Dazza, Imerys S.A. - CEO [22]

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I will let Olivier then answer on the first one, which is a bit technical. I will give you more a feeling on what we expect going forward in terms of pricing and cost position as well as the last one. At the moment, what we see is, for sure, a certain pressure on our prices. Customers suffering because of the drop in demand and therefore trying, as we do, to optimize their situation. As we have shown in the past and also in past crisis, I think we are very disciplined in our pricing policy, in our pricing attitude and our pricing strategy. So even under pressure and even if we will have to give in uncertain prices, I am convinced our price/mix compared to variable cost will remain positive, significantly positive, also because -- and second part of your question, we see today input costs stable or even dropping further. Oil is the best example. We are [living] with oil prices at the lowest level in -- not historically, but very close. Do we profit fully? No. Some of our contracts, particularly transportation and similar, have indexes. Therefore, as the drop comes in our input costs, the drop is passed through to our customers. So -- not fully, but there are other costs, what other positions where we do believe we will profit from a drop in energy, in oil and in other costs, transportation, freight. So I'm convinced we will continue to see a positive balance there. Will it be bigger or smaller? Difficult to say. But I'm quite confident we will continue to see very good numbers.

On the magnitude, it's impossible to say. I really don't know. It is, what experience has shown, is that there is a multiplying effect when this industry moves upward and down. It depends on the raw material. It depends on how many projects they will start, how much maintenance they have left behind. Is this crisis going to be 3 months? Probably there will be little or low leftover maintenance. If it is a bit longer, we might see more. I don't think it's -- there is a multiple that can explain fully.

And on your question on cost, I leave it to Olivier to pick it.

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Olivier Pirotte, Imerys S.A. - CFO [23]

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Yes. Thank you, Alessandro, and good evening, Josep. No, it's very clear. I mean, on Page 2, you can refer also the figures on Page 2, the EUR 9 million price/mix and then the EUR 2 million positive impact of variable cost to Page 14 or given in the appendix or the bridge of the EBITDA and the EBIT. Meaning that, clearly, we have 1 impact, which is the volume drop. And then for the same level of volume, what is the price/mix effect and the evolution of our cost base? But first, we have the volume impact in one end and then all the effects at, let's say in your jargon, probably constant volume. So it's really an improvement from the cost base of last year for the same level of volume.

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Operator [24]

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Your next question comes from the line of Eric Lemarié from Bryan Garnier.

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Eric A. Lemarié, Bryan Garnier & Co Ltd, Research Division - Research Analyst [25]

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I got 4 questions, if I may. The first one -- the first one, compared to your previous comments, early April, when you firstly presented your action plan, do you consider yourself more or less optimistic regarding the strength and the swiftness of the recovery? This is my first question.

The second question regarding your figures. Could you better help us to understand this large difference we observed between the performance of the current EBITDA in Q1 and the performance of the current operating income? The current EBITDA, it's performing much better than the current operating in Germany.

And the third question, do -- how long do you think you can continue with EUR 250 million of CapEx annually before going too far?

And the last question, you have announced about an acquisition in Q1. Do you think that the current environment will offer to you some new opportunities going forward?

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Alessandro Dazza, Imerys S.A. - CEO [26]

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Thank you. Olivier, I will leave it to you to explain the mathematics of EBITDA to COI or EBIT, which is easy to explain, but it's very technical, I leave it to you.

I take the first one, the strength of recovery compared to our previous discussion. I don't have a view. Frankly, I don't have a view. We do listen to presentations of banks, institutions, economists, highly paid, highly -- much better expert than me. There is a general feeling that this crisis will have more a V shape than a U shape. Is it -- are we going to be back to the same level as before? Maybe not, but close. Is it going to be 3 months, 6 months or 9 months? Nobody has the crystal ball. But the general tendency of what we hear and, therefore, what I personally believe is that all the measures that the governments worldwide are taking will help the world economy to recover relatively rapidly to a good level, relatively soon. And this is the best I can say because it's -- we will adjust. What I know is we will adjust our cost base. And our working capital, since you like this topic, as we get along to what we see. And that's why there were ranges in our action plan because if it goes fast, we'll be on the lower side, if it goes slow, we will be on the higher side, and we will really act as we go along.

In terms of CapEx, EUR 250 million for this company is really historically low. It is probably the lowest after 2009. It depends again on, do we get back to normal activity or not. Today, we can invest in health and safety, which is -- there is no compromise on it. We invest on environments because we believe it is very important. For sure, we'll limit capacity expansions also because, in this context, they might not be needed. So if the world stabilizes at a lower level than in the past, we might live with less CapEx because we will not need expansions. Shall we go back -- should we go back to the same level as before? I do look forward to increasing this EUR 250 million, also because we have, in our businesses, some operations, some markets, some products that are growing: life science, filtration. We had very good results until the crisis in paints and rubber and polymers, graphite and carbon, you know very well, mobile energy. These are all markets that show healthy organic growth, where I'm sure we will want to invest significant money in capacity expansions going forward. So it will really depends how the world recovers, how fast. And based on that, we will adjust.

We can survive for some times because it gives us the maintenance needed, the health and safety, the environmental guarantee. As you can see, we supply our customers even in this difficult time, so we can. But I want to look positive. In the future, there will be opportunities to expand. And this is the same -- the same is valid for acquisitions. Today, yes, we have just concluded a small acquisition, a $12 million business in the U.S. It's a -- it was a unique opportunity. It's a fantastic asset in perlite, dedicated particularly to agriculture, horticulture. It is a unique mineral with a great potential to grow exactly in a field where we do see growth moving forward. So we are very happy to have been able to close even in these difficult times. I believe Imerys as well as others will be careful in the months to come. But as we told you 3 weeks ago, we do believe we have -- and reiterated today, we have a strong balance sheet. We have strong liquidity. If we believe there are opportunities that are there to grab and are absolutely nice to help, I believe we will seriously consider. But there will be a slowdown in all these activities worldwide for some times. That's -- on that, I'm sure. Olivier, do you want to give us a feedback on the?

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Olivier Pirotte, Imerys S.A. - CFO [27]

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I'm sure you can also do it, Alessandro, but -- with pleasure. So Eric, if you go on Page 14 of the presentation, you will get there -- the 2 footnotes are actually related to the question you raised. Yes, in 2019, first quarter, the EBITDA was actually embracing EUR 18 million of, let's say, one-off costs mostly linked to a nonrecurring pension fund contribution, actually. So let's say, the current EBITDA would have been in 2019, EUR 18 million more than the EUR 168 million showing that -- on that graph, so EUR 186 million. And so the footnote #2 say that the decline in 2% in the reported EBITDA, current EBITDA, would have been actually 11% or 12% 1 year to another. That's very much the reading that you need to have. It was, as you know, I mean, accrues, if I say, pension fund contribution, where have been accrued in EBIT and then they are taking cash and that was what happened in first quarter '20 -- '19, actually.

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Eric A. Lemarié, Bryan Garnier & Co Ltd, Research Division - Research Analyst [28]

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Okay. There is no other explanation because even adjusted from that, is the current EBITDA is down, well, 12%? And why is the current EBIT is down 24%? Is there something on the depreciation or provision front?

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Olivier Pirotte, Imerys S.A. - CFO [29]

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No. No, no. If you -- then if you look into the details from our press release or in the appendix, you see exactly the bridge, obviously, you get the kind of same amount of depreciation from 1 year to the other. So if you go down into the P&L account, the impact is becoming actually, yes, I mean bigger and bigger percentage. Why? Because your absolute term is getting lower. So depreciation is about the same. Provision is about the same. So this is it.

And on the net results, I guess you have also -- you get also the explanation from the financial results perspective, which was also a bit unusual one-off in '19 with this profit on the repurchase of our private [channel].

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Operator [30]

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At the moment, we have one more question, which comes from the line from Pierre Bosset from HSBC.

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Pierre Bosset, HSBC, Research Division - Head of French Equity Research [31]

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Actually most of my questions have been answered. So just a follow-up question. The first one is on the level of inventories. You comment on the steel industry, but could you also comment on the other side of the business, Performance Minerals? And if you can draw a comparison with the crisis in 2009? Because this time, the drop in volume has been much more short. So is there a lot of inventories in your clients -- in the other businesses of Imerys outside the steel industry? So that's my first question.

My second question is also, as the new CEO, if you look at the balance sheet of Imerys, there is quite a lot of goodwill, EUR 2.1 billion of goodwill on the balance sheet. Do you think that the current crisis could give you an opportunity to make some noncash impairment on some of those assets, which may be to add value?

And my third question, a follow-up on Eric. I understand your explanation mathematically, but I'm still not very clear why, as it is a one-off cost, you exclude it from the current EBITDA. So I'm not completely clear on that, if you can help me.

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Alessandro Dazza, Imerys S.A. - CEO [32]

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Thank you. The answer on your first question is clearly no. We do not see major inventory effects in other markets, but in particular, in Performance Minerals. Performance Minerals, as you know, serves many more industries than our High Temperature Solutions & Materials. Therefore, there is by default, a much more balanced structure. You go from rubber to adhesives, you go from Ceramics to Filtration and life science. And you have some farm applications, some food applications. You have some construction and you have paper. So no, we do not see, definitely, any particular inventory effect on the side of our customers.

As I was saying, we -- even in this month of April that we expect being particularly impacted, we -- even in this month, we do see some markets with light growth, typically the ones serving food, pharma, agriculture. So positive numbers in the middle of a crisis. Others, like polymers and paints and rubbers, positive until basically mid- of March, before the lockdowns, the shutdown in the construction industry came in. So I -- definitely not.

In terms of goodwill, I don't know if it's -- your question was right to say if we see an opportunity to write-off our goodwill. I don't know if that's an opportunity. Of course, we will monitor the development of the business and of our activities. And therefore, if an impairment is necessary rather than opportunity is necessary or not. Today, for sure, not. I mean we are slightly down compared to last year. We know perfectly we are in an unprecedented crisis. We do expect to get out to even -- frankly, not even looked at it. It is not yet the moment to even consider. Let's see where the world will go. And then for sure, based on that, we will do our job from a financial point of view. Olivier, on the last one?

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Olivier Pirotte, Imerys S.A. - CFO [33]

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Yes. This is a question of definition between what we call current, one of our exceptional. Exceptional is going below the line, as you know. And here, it is really current because I mean paying a pension at one point in time to a previous manager is the current operating from the company. But considering, I mean, the impact and the amount, we -- I mean believe, it's to be completely transparent, better to tell you that it is a kind of one-off cost in the current EBITDA that explained why the minus 2% is probably not the best reading for you to have because that happened on the first quarter of 2019. Obviously, I mean, if we publish on a half year basis, on a full year basis, then it can be actually into the global amount here, on when such a one-off occur in operating -- one-off occur as such is more visible and our duty is to explain to you by transparency, what it is about.

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Operator [34]

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We will now take our last follow-up question from the line from Sven Edelfelt.

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Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [35]

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One follow up. It's on asbestos in the U.S., asbestos litigation. Given the fact that the trust committee in Delaware, do you expect a further delay or you still stick to your guidance of an outcome in H1?

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Alessandro Dazza, Imerys S.A. - CEO [36]

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Delaware? What do you mean, what do mean with Delaware, Sven?

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Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [37]

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Delaware is close to New York City, I think, on the (inaudible) is close to...

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Alessandro Dazza, Imerys S.A. - CEO [38]

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Of course. No, no. I thought you were referring to something new that happened now or recently in Delaware. No, in general.

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Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [39]

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No. Nothing new.

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Alessandro Dazza, Imerys S.A. - CEO [40]

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Okay. Okay. I was almost surprised you didn't ask, Sven, so I welcome your questions. Negotiations continue. We remain, as we announced basically last year that we do hope that this year, I don't remember we said in H1, but that this year, there will be a conclusion to this litigation. It is not fully in our hands. We do, for sure, our best efforts. But there are many parties involved. It is a complicated proceeding really with multiple parties. And there are ongoing negotiations as in our last call, we remain of our opinion that this will lead eventually to a conclusion. It's, in my opinion, impossible to say H1. I said, I'd be surprised if it goes above 2020, but to say the H1 is -- I don't feel comfortable in committing, because it does not depend on Imerys only.

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Sven Edelfelt, ODDO BHF Corporate & Markets, Research Division - Research Analyst [41]

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Okay. So it is very well likely happen in H2?

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Alessandro Dazza, Imerys S.A. - CEO [42]

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Even that I would like not to confirm, because in a negotiation, you have a moment where maybe the parties find an agreement. And for sure, we will be rapid in announcing and it is, what, the 29th of April. We have 2 more months in this H1. So it's not 2 days. If it was at 29 of June, I would have said you it's H2, but it's 29 of April. So I would really not commit on the timing because it's not really depending on us fully. We know only that we are doing our best, and there are negotiations ongoing from all parties, many parties involved and, therefore, some -- and a bit of impact of COVID. Fortunately, most of these negotiations are not done in physical person. And therefore, the impact of COVID is very limited. But still by default, there is a bit less agility in what you do when you are in the middle of the crisis like this one.

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Operator [43]

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Thank you. And that does conclude our question-and-answer session for today. I will hand over back to Mr. Dazza.

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Alessandro Dazza, Imerys S.A. - CEO [44]

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Thank you, and I would like to thank all of you for holding on until this late hour and listening to us and to our results. And also thank you to my colleague, Olivier, for his detailed explanations. Then good evening to all of you. Thank you.

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Olivier Pirotte, Imerys S.A. - CFO [45]

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Good evening, and thank you.

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Operator [46]

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That does conclude the conference for today. Thank you all for participating. You may now disconnect.